What To Watch For In Costco’s Stock Post Q3?

[Note: Costco’s fiscal year ends in August]

Costco (NASDAQ: COST) is scheduled to report its fiscal third-quarter results on Thursday, May 25. We expect Costco to likely beat the revenue and earnings expectations. It is worth pointing out that despite the pandemic and inflation, the business has managed to grow strongly. Consumers loaded up on essentials in high quantities to keep costs low. However, Costco’s March 2023 sales data pointed to a potential slowdown for the business – with total comparable sales down 1.1% year-over-year (y-o-y), and e-commerce down 12.7% y-o-y. This marks the first time in multiple years that comps declined for the company, largely driven by rampant inflation. However, things improved a little in the April 2023 sales report – which saw its total comparable sales grow only slightly to 1.4%, and e-commerce was down 5.9%. Now that the company’s monthly sales growth looks slow, investors might need to brace for potentially softer quarters ahead. The recent decline might be alarming but Costco makes a majority of its profits from its membership income, so comparable sales growth isn’t as important for it as it is for other retailers. The monthly reports do not include any information on Costco’s profitability or segment and membership revenue breakup.

Our forecast indicates that Costco’s valuation is $508 a share, which is almost in line with the current market price. Look at our interactive dashboard analysis on Costco’s Earnings Preview: What To Expect in Fiscal Q1? for more details.

(1) Revenues expected to be slightly ahead of consensus estimates

Trefis estimates COST’s FQ3 2023 revenues to be $55.1 Bil, marginally higher than the consensus estimate. In Q2, Costco’s membership fee income was 6.2% higher than the prior-year period. And the renewal rate remained strong, at 92.6% in the U.S. and Canada and 90.5% worldwide. We need to keep an eye on this metric when calculating Costco’s long-term growth potential. Also, Costco currently boasts nearly $14 billion in cash, cash equivalents, and short-term investments. Its long-term debt is only $6.5 billion, so Costco has a net cash position on its balance sheet. For the full-year 2023, we expect Costco’s Revenues to grow 8% y-o-y to $245 billion.

(2) EPS likely to match consensus estimates

COST’s FQ3 2023 earnings per share is expected to be $3.30 per Trefis analysis, almost matching the consensus estimate. In the second quarter, Costco’s earnings per share rose from $2.92 last year to $3.30 this year, despite supply chain pressure.

A membership fee increase is unlikely this year because of high inflation, but it will happen sooner rather than later. Costco generally raises its membership fees every five years, last raised in 2017. This should help the company boost its bottom line further.

(3) Stock price estimate in line with the current market price

Going by Costco’s valuation, with an EPS estimate of around $14.52 and a P/E multiple of 35.0x in fiscal 2023, this translates into a price of $508, which is almost in line with the current market price. Costco’s ability to generate higher sales consistently, as well as turn them into profits, has impressed investors, and this has led to an elevated P/E as compared with its peers even before the pandemic when it hovered around 30x.

It is helpful to see how its peers stack up. COST Peers shows how Costco’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

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